Post the sharp decline in inflation in January due to the end of long-distance telephone charges and price falls in several services categories (although some of the decline can be attributed to the base effect), Mexico's inflation through mid-March seems to have stabilised near 3%, which is Banxico's target level.
While year-ahead inflation expectations have increased this year, the weakness in core inflation (2.4% yoy in February) due to low dwelling inflation (0.65% yoy in February) in particular and low consumption growth in general suggests that it will be some time before inflationary pressure reappears.
"We estimate full-month inflation to have moderated marginally to 2.99% yoy (0.26% mom) in March, while bi-weekly inflationlikely rose marginally to 3.00% yoy. Core inflation likely inched up to 2.43% yoy (0.25% mom)", says Societe Generale.
Looking ahead, the prevailing output gap, lower wage growth and low MXN pass-through are likely to keep inflation in check structurally. As a result, growth in aggregate demand will remain the key driver for both inflation expectations and monetary policy in the medium term.
